Category Archives: Resource Constraints

Technology: Singularity or Collapse? (Part 1: For Ever Exponential)

In the opening chapter of Ray Kurzweil‘s “The Singularity Is Near” we are presented with the following parable:

A lake owner wants to stay at home to tend to the lake’s fish and make certain that the lake itself will not become covered with lily pads, which are said to double their number every few days. Month after month, he patiently waits, yet only tiny patches of lily pads can be discerned, and they don’t seem to be expanding in any noticeable way. With the lily pads covering less than 1 percent of the lake, the owner figures that it’s safe to take a vacation and leaves with his family. When he returns a few weeks later, he’s shocked to discover that the entire lake has become covered with the pads, and his fish have perished. By doubling their number every few days, the last seven doublings were sufficient to extend the pads’ coverage to the entire lake. (Seven doublings extended their reach 128-fold.) This is the nature of exponential growth.

While ‘the water lily and the lake’ appears a strange choice of metaphor since if nothing else it highlights the importance of boundaries to growth, what Kurzweil was trying to communicate was how technology has barely begun to transform our lives.

By contrast, consider the 1972 report to the Club of Rome published under the title “The Limits to Growth.” Much maligned and mostly misrepresented, The Limits to Growth (LTG) was nothing more than a mathematical analysis of linear and exponential growth rates and ultimate constraints. According to the authors, the tyranny of exponential growth rates would eventually lead population and industrial production to explode, setting off a negative feedback in terms of burgeoning pollution and the eventual exhaustion of food and resources. The report never provided specific dates for the depletion of individual materials, although nine our of ten commentaries on the report claim it did (for a post I did on this particular urban legend, see here). Nonetheless, what the report did do was suggest that the idea of inevitable constant human progress was a dangerous myth. Continue reading

The Limits to Growth, Urban Legends, Economists and Dieter Helm

At the heart of economics is the idea of scarcity—or rather scarcity in the face of infinite wants. Yet scarcity is an issue that touches upon us all, and thus draws the interest of different scientific disciplines. So if we take the idea of scarce oil (let’s call it Peak Oil), we should not be surprised that chemists, physicists, engineers and geologists would want to take a view.

Nonetheless, many economists appear to believe that they have a unique and superior understanding of how scarcity evolves through time (using the tools of supply, demand and price); and they often also behave as if no non-economist could ever hope to gain such insights. As such, we may criticize them for being arrogant—but not as necessarily wrong (and at this point I have to declare that I am an economist by training). But wait a minute, if the arguments of mainstream economists are so evidently correct, why do many of them appear to have a pathological need to misconstrue the arguments of their opponents?

Probably the most enduring urban legend (or urban myth if you prefer the term) of them all in the study of resources is the common interpretation of The Limits to Growth report to the Club of Rome published in 1972. Surely, everyone knows that the report’s forecast of resource exhaustion by the year 2000 turned out to be nothing but a huge joke. And if we don’t know this directly ourselves (having not read through the report because frankly who has the time, and where would we find a copy anyway these days), we know because high profile journalists and media pundits have told us of the report’s spectacular failure on TV, in newspapers or over the internet (or someone in a pub or bar said that is what the report said). Continue reading

The Chief Investment Officer of JP Morgan Comes Out of the Peak Oil Closet

At the heart of the cornucopian view of energy abundance lies the belief that technology will overcome any natural resource constraint. The poster child for this view of the world is Moore’s Law, whereby computing power follows the allegory of a grain of wheat on a chess board (so promising untold riches for us all).  Interestingly, Michael Cembalest the CIO of JP Morgan—surely the antithesis of The Archdruid—displayed a large dose of scepticism over this technological nirvana in a recent report that commenced by highlighting a few famous predictions of our energy future (in so doing, Cembalest makes the point that Moore’s Law is the technological exception—not the rule):  Continue reading

Sex, Violence, the Amish and the IMF

If you like your Peak Oil raw, the blogosphere provides plenty of sustenance. At sites such as The Archdruid Report, Casaubon’s Book and The Automatic Earth, we see a small section of society actively preparing for a major discontinuity in the type of lives we lead. One of my favourite representations of this meme is provided at Clusterf**k Nation, a blog run by the author James Howard Kunstler. Kunstler jumps the divide between hard analysis of the perceived problem and fictional representations of how things could unfold. You may not agree with Kunstler, but you will not be bored.

In the non-fiction book The Long Emergency, Kunstler gives an explanation of how the global economy could reverse as oil production peaks. But for me, Kunstler’s fiction leaves a more enduring memory. In the World Made by Hand series we see society shrinking in upon itself. The death of distance lauded in the 1990s has become a cruel joke:  the principal means of transport are reduced to foot, horse or boat (bicycles even fall by the wayside through a  lack of tires). And political relationships relapse to those existing in the pre-modern period. We are faced with feudalism: medieval free towns, lords of the manor (or their scrap-yard equivalents), serfs, self-contained religious sects and marauding bands of muggers.

At its best, life appears to resemble an Amish country idyll but with a lot more sex. At its worst, the break-down in social order and frequent bouts of extreme violence place us in the pages of Cormac McCarthy’s ‘The Road’.

For the majority of neoclassical economists, such visions are nothing but dystopian fantasies: doomer porn for those with a disposition toward the depressive. Nonetheless, the historical record gives one pause f0r thought: economies do suffer from shocks, which can in turn lead to political dislocations. Within living memory, we saw an economic discontinuity in the 1930s lead to social mayhem throughout Europe and the death of around six million Jews. People still living became unwilling participants in adaptations of Schindler’s Ark and Sophie’s Choice.

So is there any way to get from the existing economic consensus to the type of economic breakdown that Kunstler professes to see?

In my last post, I argued that there was no inherent contradiction between Peak Oil and neoclassical economic thought from a theoretical perspective. The argument was purely over the shape and dynamics of supply and demand curves. To take us into Kunstler’s ‘World Made by Hand’ would require a massive economic contraction sufficient to fracture our global political institutions, in turn setting off a second round of economic deterioration that demolishes our domestic political and social structures. Can Peak Oil take us into the first stage of this process? To do so, a neoclassical economic analysis would be looking for three things: 1) highly inelastic supply and demand curves for oil, both in the short and long term, 2) a supply curve that moves to the left and 3) a key role for oil in economic growth.

Surprisingly, the IMF published a section (entitled “Oil Scarcity, Growth, and Global Imbalances“) within its flagship Word Economic Outlook back in April 2011 that set out some scenarios that indirectly dealt with all these three things.

As regards the elasticity of oil demand to price, the IMF was not the first international organisation to warn of the world’s vulnerability to an oil price shock. In the International Energy Agency’s flagship 2010 World Energy Outlook report, the Executive Summary had a section entitled “Will peak oil be a guest or the spectre at the feast?” which led off with the following paragraph:

The oil price needed to balance oil markets is set to rise, reflecting the growing insensitivity of both demand and supply to price. The growing concentration of oil use in transport and a shift of demand towards subsidised markets are limiting the scope for higher prices to choke off demand through switching to alternative fuels. And constraints on investment mean that higher prices lead to only modest increases in production.

What this statement means is that the oil supply and demand curves are looking highly inelastic. In other words, when the oil price goes up there is not that much room to either substitute out of oil into alternative sources of energy or bring more oil into production.

For the demand elasticity, the IMF went further and applied some numbers to the problem. Over the short term, the IMF sees the demand curve as almost vertical. In their words “a 10 percent increase in oil prices leads to a reduction in oil demand of only 0.2 percent”. This is a pretty frightening statement: it says we have almost no ability to adapt to an oil price shock over the short term. So god help us if a) Iraq plummets into an internecine civil war, b) Israel attacks Iran or c) Nigeria descends into internal chaos. The short-term supply elasticity is also seen as very low at between 1 and 10 percent, and mostly consists of the production buffer held by Saudi Arabia. Should this buffer go, the short-term supply curve becomes in effect vertical (no increase in supply at any price).

Nonetheless, this is not the core of the peak oil doomer scenario; for us to approach collapse, we must see viciously steep long-term supply and demand curves, against which both substitution and technological invention appear ineffectual. And this, in effect, is what the IMF at least suggests on the demand side. It calculates a long-term price elasticity of oil demand (long term defined as a 20-year time horizon) of 7%. This again appears incredibly small. You can double the price but you can hardly make a dent in demand. How could this happen?

For this, we must understand the unique attributes of oil: energy density and transportability. These characteristics are incredibly difficult to replicate. Accordingly, where it has been possible to substitute out of oil, much of the transformation has already taken place. In other words, the shift to gas and coal for electrification previously provided price elasticity for oil, but that has now gone.

Now the IMF’s  baseline scenario for oil production is for 1.5% annual growth. However, in Scenario 2 of the report a contraction in supply of 2% per annum is also considered. The 2% decline number is taken from a paper by Sorrell et al in Energy Policy (that is unfortunately behind a pay wall). In this scenario, we move into a world where the supply curve is moving to the left as opposed to a cornucopian view of the world where technology always pushes the supply curve to the right.

Moreover, if you take this Peak Oil decline scenario and combine it with the IMF’s previously calculated demand and income elasticities, global capitalism suffers a significant shock. In their words:

The most striking aspect of this scenario is, however, that supply reductions of this magnitude would require an increase of more than 200 percent in the oil price on impact and an 800 percent increase over 20 years. Relative price changes of this magnitude would be unprecedented and would likely have nonlinear effects on activity that the model does not adequately capture. Furthermore, the increase in world savings implied by this scenario is so large that several regions could, after the first few years, experience nominal interest rates that approach zero, which could make it difficult to carry out monetary policy.

It should be noted that ‘several regions’ are already experiencing nominal interest rates approaching zero. Thus if we are already entering the foothills of a Peak Oil shock, monetary policy is already incapably of easing the blow over large swathes of the globe including the United States.

Unfortunately, the IMF’s Scenario 3 paints an even bleaker picture since it recognises some of the more recent work on energy’s role in GDP growth. Under traditional approaches, the contribution of oil to economic output has been pegged at around 5% for the tradeables sector and 2% for the non-tradeables based on the cost of oil within the economy. New methodology suggests that these figures could be as high as 25% and 20%, respectively. The argument runs thus: certain technologies are premised on access to energy. Reduce the access to energy and the technology becomes defunct.

As an example, take the first Newcomen steam engine, developed around 1710, that allowed water to be pumped out of coal mines; in so doing, mines were opened up to exploitation at a hitherto unprecedented scale. But the Newcomen engine relied on a bountiful supply of coal. If the coal hadn’t been there, the steam engine could not be operated. The machine technology and the energy can therefore be thought of as a single package: remove one and you cease to have the other.

In a more up-to-date context, think of a sophisticated airline routing algorithm that minimises the number of empty aircraft seats and reduces ticket prices. Doubling the price of jet aircraft fuel not only reduces the number of planes in the air but also reduces the optimisation potential of the algorithm, so setting off second round effects. Oil scarcity can therefore lead to what is, in effect, the disinventing of technology.

Overall, a neoclassical framework built on a slightly more pessimistic premise can have some quite alarming implications. In the words of the IMF:

But if the reductions in oil output were in line with the more pessimistic studies of peak oil proponents or if the contribution of oil to output proved much larger than its cost share, the effects could be dramatic, suggesting a need for urgent policy action.

Nonetheless, even if we pile an oil supply contraction (IMF Scenario 2) on top of a greater role for oil in the economy (IMF Scenario 3), we still are not reduced to the existence of Kunstler’s post apocalypse Amish. The IMF does not give a compound figure for one scenario placed on top of another, but for the US we are probably looking at a 20-25% decline in GDP over a 20 year period against trend and a lot steeper drop for emerging Asia. Assuming trend is for modest growth, this type of oil shock would flat line growth overall.

The relatively benign worst-case outcome of no growth (but no descent), however, assumes that massive price and income shocks can be smoothly absorbed both within and between societies. Unfortunately, we have already seen financial systems struggle with shocks an order of magnitude smaller.

In conclusion, the IMF’s formal neoclassical analysis could easily take us to the brink of Kunstler’s descent, but we would still need something beyond a traditional economic shock to push us over. For that we would need to turn to the science of complex systems or to geopolitics, topics that I intend to return to in future posts.

The Dystopian Dance

The issues of peak oil and climate change can both come across as having a certain millennial taint. Humanity, in its stupidity, is punished by nature. Or, as James Lovelock would put it, we are seeing the ‘Revenge of Gaia’. The Millennialists, however, see a happy ending at the other end of the tumult—at least for the chosen, enlightened few—while those of an atheistic or agnostic view of the world are condemned to a permanent descent into dystopia. No escaping ‘the end of days’ for them in a society under collapse.

Nonetheless, the fact that dystopias have frequently been the province of cranks does not mean they are not worthy of closer inspection. Prose writers have traditionally been the first ‘unto the breach’ when it comes to contemplating what the man (or woman) on the street deems unmentionable. Wells, Huxley, Orwell and Burgess come immediately to mind when we think of technological or political dystopias. Who having read Orwell’s ‘Animal Farm’ and ‘1984’ could not be a little more aware that a government (from any part of the spectrum) offering a political utopia may not instead transform our lives into a permanent dystopia.

Back in the 1970s, I read Nevil Shute’s ‘On the Beach’ and the completely abstract concept of a nuclear exchange had a little more meaning in one teenager’s mind.

With a novel, it is very difficult to throw the epithet ‘alarmist’; the writer is not telling us with certainty what will be but rather imagining what can be. And it is the description of a possibility that will alter our brain’s cognition of risk more than any number of reports from the Intergovernmental Panel on Climate Change report (as I touch on in my last post here).

To date Peak Oil has brought out better works of fiction than climate change (although usually climate change has a walk on part). James Howard Kunstler’s ‘World Made by Hand’ and ‘The Witch of Hebron’ both bring home in vivid colours the day-to-day struggles in a world with no easy access to cheap oil. Like many such works, though, there is a strong thread of the irrational. Religion (although not as we traditionally know it) and magic become a greater part of life’s mix in the author’s eyes, as a result of the failure of rationalism as embodied in science.

Kunstler is still somewhat a cult figure and has not acquired the literary fame of two other novelists that have dealt with dystopias head on: Cormac McCarthy and Margaret Atwood. The environmental campaigner and journalist  George Monbiot even had these words to say about McCarthy’s ‘The Road’:

“It could be the most important environmental book ever. It is a thought experiment that imagines a world without a biosphere, and shows that everything we value depends on the ecosystem.”

Both McCarthy’s ‘The Road’ and Atwood’s ‘The Year of the Flood’, however, start their stories after some unknown cataclysmic event. The reader may be left with a sense of unease, as was my teenage mind with Shute’s ‘On the Beach’, but an unease with what (with Shute I knew exactly)? Genetic engineering, global capitalism, advanced technology, pandemics, climate change? Tellingly, the publicity shot below from the movie ‘The Road’ has recently been wheeled out to accompany press articles on the potential impact of a euro break-up; the movie has become a generic metaphor for collapse, and climate change has to get in the queue.

Personally, I believe climate change has yet to find its Tolstoy. We see such luminaries from the world of science as Martin Rees openly contemplating the catastrophic potential of climate change, but this has had little resonance in the arts—or at least art that has caught the public’s imagination. Bill McKibben, the founder of the campaigning organisation 350.org, contrasts the situation with HIV, which produced “a staggering outpouring of art that, in turn, has had real political effect” (here). McKibben’s frustration is palpable:

Here’s the paradox: if the scientists are right, we’re living through the biggest thing that’s happened since human civilization emerged. One species, ours, has by itself in the course of a couple of generations managed to powerfully raise the temperature of an entire planet, to knock its most basic systems out of kilter. But oddly, though we know about it, we don’t know about it. It hasn’t registered in our gut; it isn’t part of our culture. Where are the books? The poems? The plays? The goddamn operas?

McKibben goes on to lists some of the reasons artists have not effectively engaged: diffuse perpetrators, disbursed victims, different time frames—in fact, a nightmare plot to narrate. But despite the difficulties, I believe that until we get the ‘goddamn operas’ communicators of climate chance science will have an uphill battle in changing people’s minds.